Effective
Engineering
e-Newsletter
– 7/03/2008
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eN-080703:
The Costs of Being “Free”
By Tom
Dennis – President, Effective Engineering [tdennis@effectiveeng.com]
You’ve just finished
a long project and released a product that is getting a great reception in
the market. It’s time to be congratulated, or to relax for a moment, or to
start in on a new and challenging project when your boss walks in and asks
what it would take to add just one small feature that someone at a trade
show asked about. You think about it quickly and determine that adding just
that one small feature would likely be a small effort for you to
implement, a day or two of work. You tell your boss, and he says, “That’s
virtually free!” Do it!” He comes back the next day and asks what would
be involved in adding just two or three other small features, also mentioned
by one potential customer at the recent trade show. Since these also look
to be small efforts for you to implement, your boss considers them “free”
as well and tells you to add them. And so it continues. With little
thought or appreciation of what’s really involved and what this means
won’t be able to be done, you (and many others) get caught up in efforts to
add “free” features to an already great product. No analysis of the
real costs and benefits of these features is done. This means no analysis
of the direct costs and benefits, which should clearly be done. However,
likely more critically, it means no analysis of the indirect costs and
benefits; that is what are the costs and benefits of doing something else –
the opportunity costs. There is no appreciation of the costs of being
“free”!
OK, so what’s the big deal about adding a “few” small
features to a product? What can it hurt? Well, it can hurt a lot. In
fact, some companies have gone out of business by not paying attention to
what will not be done because of adding those “few” small features.
It must be recognized that no feature is really “free”. It may be a
small effort for an engineer to write the code or add the circuitry, or
whatever else may be needed, but that is not all that’s needed to add this
feature. It may take a short time to implement the feature, but it must
also be tested, documented, marketed, manufactured, sold, supported,
accounted for, etc. That means work for virtually every department in the
company to add this one small feature, not just for the engineer to
implement it. And when a problem arises in any of these other areas, it’s
back to the engineer to make adjustments and start the process all over
again.
Before any feature gets added, whether small or large, a detailed
costs/benefits analysis should be undertaken to look at the costs and
benefits associated with this feature. Too often such analysis is
ignored entirely because the additional feature(s) is viewed as “free”.
This analysis is essential and must look not only at the direct costs and
benefits, but also at the indirect costs and benefits. What does this mean?
First, understand the direct costs of this feature in detail. This goes
well beyond the effort it will take for the engineer to incorporate and unit
test this feature (his loaded salary and other costs to add the feature).
It must also include the loaded salaries and other costs for testing this
feature, not just in isolation but fully integrated with the product as a
whole, and devising tests to break the feature or other capabilities of the
product that the addition of this feature may impact. What are the loaded
salaries and other costs to document this feature in all of the many
documents which may be associated with the product (e.g. user manuals,
installation manuals, quick-start manuals, repair manuals, troubleshooting
manuals, etc.)? What are the loaded salaries and other costs to properly
market and sell this additional feature (e.g. sales and marketing materials,
ads, presentations, etc.)? What are the loaded salaries and other costs to
manufacture this additional feature (e.g. ramp down old product while
ramping up new product, upgrading old product in the field, handling more
product codes in MRP/ERP system, documenting changes to production
processes, etc.)? How about to support this feature (e.g. customer support,
sales support, technical support, etc.)? How about to account for this
feature (e.g. added accounting codes, SKU’s, revised spreadsheets or MRP/ERP
system changes, etc.)? Etc. The reach of a change to or addition of even a
simple feature is broad and deep, and should not be underestimated.
Second, understand the direct benefits of this feature in detail. What are
the incremental sales that will result from this specific feature? This
means how many additional incremental units will be sold and how much
incremental revenue will be generated due solely to these specific
features.
Third, understand the direct impact of this added feature to company’s
bottom line, including incremental impact to gross margin (contribution to
the business after paying for direct-fixed and direct-variable unit costs),
incremental impact to contribution margin (the amount each unit sale adds to
profit), and incremental impact to net income or profit (what the company
actually adds to the bottom line for each sale). If the addition of this
feature doesn’t make significant money for the company, why do it?
(see also
eN-030522 – Keep your Eyes on THE GOAL!)
Fourth, once the direct costs and benefits of adding this feature are
thoroughly analyzed and understood, if it is determined that you should
otherwise move forward with adding the feature(s), then the more difficult
and critical work of examining the intangible or opportunity costs/benefits
must be analyzed. That is, a careful look at what else could be done
instead of adding these “free” features, and whether these
alternatives would make more sense. This is very often overlooked entirely,
but can make the difference between the success and failure of a business.
To look at the opportunity costs/benefits, first think about other things
your customers are interested in, perhaps totally unrelated to the product
these “free” features would be associated with. Is there another
product or service that customers have expressed strong interest in that
could now be pursued if the resources that would be working on the “free”
features were put on this instead? There may be low-hanging fruit that
could bring in substantial revenue and profit that you haven’t considered
because of all of the resources that were tied up in developing the newly
released product. With some of those resources now available, can that
low-hanging fruit be picked (along with the revenues and profit it can
generate)? Or are there entirely new directions with much higher potential
that can be pursued that could open up entirely new directions for the
company with much greater long-term, mid-term, or even short-term impact to
company success? In an ideal world, such opportunity analysis would have
been done in advance and allocation of resources after completion of a
project would be pre-determined. But the thought of adding “free”
features often intervenes and prevents these pre-selected opportunities from
going forward.
Don’t put yourself in the position of looking back at some point in the
future thinking about what might have been. Missing golden opportunities
because of being blinded by near-term easy or “free” actions can
happen all too easily. Proper planning for the future coupled with
thoroughly understanding both the tangible and intangible costs and benefits
of what you are considering can prevent pursuing near-term small gains at
the expense of longer-term large gains. It is critical to truly recognize
the costs of being “free”.
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Effective Engineering Consulting Services, All Rights Reserved
